We have certainly done our best to predict and chronicle the housing meltdown here on the blog. Now comes Dirty Deeds, a B/W article describing how yesterday’s great idea, a mortgage on ‘some kind of a house’ has become today’s ‘toxic title.’ This is why you should subscribe to B/W. The actual article in the magazine has a photo of the back of an abandoned ‘house’ in Buffalo NY. Old tires are stacked against a graffitti covered exterior, windows boarded up, snow covers the lack of landscape. The house value minus foreclosure, back taxes, and repairs is worth nothing, only the land value remains, ie, the cost of demolition will actually lower the net value of the land! And so no one wants to claim ownership.
One of my themes in class is/will be that the business cycle is never repealed. After disenchantment with the stock market post dot.com bust and 9/11, ordinary folk and Wall Street turned to real estate. That cycle went bust in Texas after the oil boom bust of 1986. The same has now happened nationally as Countrywide was taken by BAC this week and Merrill scrambles all over the world for enough cash infusion to avoid the same fate. Gee Robert Rubin was supposed to be sooooo smart, how did CITI get in trouble with him sitting as Chairman of the Board?
Consider that the mania for real estate gave allowed Don Trump another Phoenix like rise to prominence. His Apprentice show has given way to Celebrity Apprentice then get rich quick seminars on real estate and now how to get rich on real estate foreclosure seminars! The only one getting rich of course is Donald (check the graph of TRMP). Cable tv shows like Flip this House assume that there is always a market for the old fixer upper, as Buffalo lender have discovered, not necessarily. At this point it is rather like the parlor game of musical chairs, someone is short a chair to sit in every time the music stops, whoops, and they hold the toxic title.
The same thing happened in the oil bust of 1986. Marginal producing oil wells were profitable at $36 oil in 1981. But at $12 the cost producing the oil and maintaing the well as it dried up made the property worthless. So who was going to plug and abandon the well? Explanation, one does not just leave a hole in the ground to let whatever seep into the water table, it has to be properly closed. Like our abadoned home in Buffalo, no one wanted to assume the responsibility for the plugging the well, finger pointing ensued, the bank owns it, no the bank responds, we never foreclosed, it is your hot potato.
And so the business cycle is complete. Seemingly marginal properties be they oil wells or houses, became valuable as commodity prices in a sector increase. Asset values rise, consider that oil prices have risen 8x since 1998-9! Let them fall back 50% or so and the same thing will happen again.
How many $500 K condos in Las Vegas will be tomorow’s toxic title?
Professor Elam 
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